Archives for category: Corporate

Many individuals form business organizations for various reasons. Some of the most common reasons are to address tax matters, limit liability, provide a specific or perpetual duration, and address ownership transferability issues. The Texas Business Organizations Code (“TBOC”) authorizes individuals to form three general type of entities: partnerships, corporations, and limited liability companies (“LLC”). While there are other forms of entities which may be used for particular professions or other specific uses (such asnon-profit or limited liability entities), these three forms comprise tcorpKithe most commonly used entities. The partnership form is further divided between general partnerships and limited partnerships.

Why is it important to address transferability issues in a business organization? For one, the success of a business, particularly a small business, typically hinges upon the abilities of the owners who are usually also the managers. It is important that each owner know with whom he or she is conducting business. Furthermore, the owners at some point may wish to sell their interests in the entity. Since there is no ready market for investors of small businesses interests, transfer restrictions in the form of buy-sell agreements can be used to create a market and set a reasonable price. In other instances, transfer restrictions can assist with compliance of state and federal laws. Certain corporations may be exempt from securities registration under federal and state law where transfer restrictions are used.

In most instances, the owners of a business organization may set up their own transfer rules in a written agreement. For corporations, those rules may be set forth in the Bylaws, but are typically found in a separate document referred to as a shareholder agreement. For partnerships, transfer restrictions are set forth in a partnership agreement. For LLCs, the company agreement contains the transfer restrictions.

If the owners fail to provide their own transfer rules, the TBOC will regulate such transactions. Leaving aside the corporate form, the rules set forth in the TBOC for partnerships and LLCs are similar. Before becoming an assignee partner or member, consent of all of the partners or members must first be obtained. In those instances where consent has not been obtained, a transfer of an ownership interest will not result in the assignee achieving partner or member status.

However, the mere assignment without consent (absent an express written agreement to the contrary) will not void the transfer of the interest to the assignee. Unless restricted or prohibited by the partnership or company agreement (or other document), a partner or member may freely assign his or her interest to another party. The preceding rule also applies to the transfer of corporate shares. However, without the consent of all owners, the assignee will not be entitled to exercise the rights or powers of a partner or member in the entity. Nor will the assignee become liable as a partner or member solely because of the transfer. Instead, the assignee is entitled to be allocated any income, gain, loss, deduction, credit, or similar items, and to receive distributions to which the assignor was entitled, to the extent such are part of the assigned interest.

For corporations, the owner’s (or shareholder’s) interests in the company are generally freely assignable unless otherwise agreed to in writing between the owners or disallowed under the TBOC. For small business corporations, the implementation of a shareholder’s agreement is of particular importance. The shareholder’s agreement allows the owners to predetermine the manner in which their relationship will operate and is akin to a partnership or company agreement. Without a shareholder’s agreement, minority shareholders may have little or no recourse to control how disputes are resolved. They may be unable to remove themselves from the corporate ownership structure without a significant financial loss. Majority shareholders may try to squeeze or freeze out the minority shareholders and force them to sell their interests for less than they are worth.

Shareholder agreements will usually contain one or two types of transfer restrictions: mandatory buy-sell and first option buy-sell agreements. A mandatory buy-sell is triggered by a specified event, such as the death, disability or divorce of a shareholder. When the event occurs, either the corporation or the other shareholders are required to purchase the shareholder’s interest pursuant to specified pricing and payment terms contained in the agreement. A first option buy-sell reserves the right of all shareholders or the corporation to purchase shares in preference to third-parties. As opposed to the mandatory buy-sell, the first-option buy-sell does not require that the other shareholders or corporation purchase the selling shareholder’s interest, but instead allows them to do so if they so choose. If the option is not fully exercised, then the shareholder is allowed to consummate a sale to a third-party.

Restrictions on transfer are important aspects of doing business as a Texas business organization. Failure to obtain and use them can result in unintended consequences to the business and its owners.

Scott Alagood is board certified by the Texas Board of Legal Specialization in Commercial and Residential real estate law. He can be reached at alagood@dentonlaw.com or http://www.dentonlaw.com.

Receiverships PicturesA receivership is an equitable and legal remedy that may be used to acquire possession of property by a court appointed party known as a receiver. A receiver’s powers are derived directly from the appointing court. The receiver is a disinterested party who represents and protects the interests of all other persons for the receivership property.

A court appointed receiver is an extremely harsh remedy. The remedy allows the State to take possession and control of private property and place it in the hands of a third party. A court will appoint a receiver only if there are no other less harsh remedies available.

Basis for Receivership.

A receivership in Texas may be installed under rules of equity (“fairness”) or pursuant to a specific statute. Under equity, a receivership must be “ancillary” to an otherwise apparently valid claim or remedy and to protect or preserve property during the pendency of a lawsuit. Where the receivership arises out of a statute, it doesn’t matter if ancillary claims exist.

Types of Receiverships.

Equitable Receiverships. A court may appoint a receiver in any case in which a receiver may be appointed under the rules of equity.

General Receivership Statute. Chapter 64 of the Texas Civil Practice & Remedies Code allows a court to appoint a receiver under any of the following circumstances:

  • Action by vendor to vacate a fraudulent purchase of property;
  • Action by creditor to subject any property or fund to his claim;
  • Action between partners or other jointly owning or interested in any property or fund;
  • Action by a mortgagee for foreclosure and sale of mortgaged property; or
  • Corporation that is insolvent, or is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights.

Family Law Receiverships. In conjunction with a divorce proceeding, a court may appoint a receiver as a temporary order for the preservation and protection of spousal property.

Post Judgment Receiverships. Judgment creditors may seek the appointment of a receiver to assist in the satisfaction of a judgment in certain circumstances.

Business Entity Receiverships. A receiver may be appointed for a corporation that is insolvent, is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights. The Texas Business Organizations Code deals with the appointment or a receiver for any domestic entity (including corporations, partnerships, limited liability companies, and associations) or its property.

Mineral Receiverships. A receiver may be appointed where a mineral interest or mineral leasehold interest is owned by a nonresident or absent defendant, and upon the application of a person who has a vested, contingent, or possible interest in land or an estate subject to a contingent future interest in order to lease the land for development pending the vesting of the contingent interest.

Congregational Receiverships. A receiver may be appointed for a religious congregation which had maintained regular forms of work and worship in a community at regular intervals, but ceased to function in such capacities for at least one year.

Receiver Qualifications.

To qualify as a receiver a candidate must be a citizen and qualified voter of Texas at the time of the appointment. A candidate must not be a party, attorney, or other person interested in the action in which the receiver is sought.

Appointment Procedures.

Absent the appointment of a receiver upon the court’s own motion, a party seeking such appointment must file an application with a court having proper jurisdiction over the subject matter of the suit. Except in certain extreme circumstances, notice and opportunity to be heard must be provided to all adverse parties prior to the appointment. An ex parte appointment should rarely be sought, and very well may constitute an unlawful taking of property the Texas and U.S. Constitution.

The receiver must take an oath to faithfully perform all duties of the receivership and execute a good and sufficient bond.  The applicant must file a bond approved by the clerk payable to the defendant in an amount determined by the court. A court may dispense with the issuance of the applicant’s bond in a divorce.

Receivership Powers and Duties.

A receiver may take charge and keep possession of receivership property, receive rents, collect and compromise demands, make transfers, and perform other acts as authorized by the court. The act of the receiver does not bind the receivership property unless first authorized and subsequently approved by the court.

Following the appointment, a receiver must take an inventory of the property received and report it to the court. Where a party or other person subject to the receivership fails to release possession of receivership property, the receiver may bring an action to obtain possession.

A receiver may only sell the interest that it has in the receivership property at the time the receiver was appointed. Any receiver sale is a judicial sale and must be authorized and confirmed by the court before title will transfer.

Once all property has been disposed of and all proceeds distributed, then the receiver should be discharged. The final discharge order should include the final accounting of the receivership, a determination of the receiver’s fees, the restoration of any remaining property to the rightful owners, and a final discharge the receiver.

Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Legal Specialization and can be reached at alagood@dentonlaw.com and http://www.dentonlaw.com.